Fiserv, Inc. Form 10-K Summary
Business context and reporting period
Fiserv is a global financial-services technology provider serving approximately 14,500 clients, primarily financial institutions, retailers and merchants. Its two operating segments are Payments and Financial. Products include account processing, electronic payments, card and ACH processing, bill payment, digital banking, lending, investment services and related technology.
This filing covers the fiscal year ended December 31, 2014. The filing also provides unaudited quarterly data for 2014 and 2013. Processing and services revenue represented 83% of 2014 consolidated revenue and was primarily generated under recurring, account- and transaction-based contracts generally lasting three to five years.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $5,066 million | $4,814 million | Up 5% |
| Processing and services revenue | $4,219 million | $4,035 million | Up 5% |
| Product revenue | $847 million | $779 million | Up 9% |
| Operating income | $1,210 million | $1,061 million | Up 14% |
| Operating margin | 23.9% | 22.0% | Up 190 basis points |
| Income from continuing operations | $754 million | $650 million | Up 16% |
| Diluted EPS from continuing operations | $2.99 | $2.44 | Up 23% |
| Net cash from continuing operating activities | $1,307 million | $1,039 million | Up 26% |
| Capital expenditures | $292 million | $236 million | Up 24% |
Payments revenue was $2,747 million, up 8%, with operating income of $768 million and a 28.0% margin. Financial revenue was $2,367 million, up 3%, with operating income of $773 million and a 32.6% margin. Approximately 6% of revenue came from clients outside the United States.
Total assets were $9,337 million at year-end, including $5,209 million of goodwill and $2,003 million of intangible assets. Goodwill and intangible assets together represented approximately 77% of total assets. Shareholders’ equity was $3,295 million.
Cash and cash equivalents were $294 million, compared with $400 million at December 31, 2013. Total debt, including current maturities, was $3,803 million, compared with $3,848 million in the prior year. The company had a $2.0 billion revolving credit facility maturing in 2018, was in compliance with its debt covenants, and had investment-grade ratings of Baa2 from Moody’s and BBB from S&P, each with a stable outlook.
Material changes versus the prior comparable period
- Revenue growth accelerated in Payments, driven by recurring businesses, new clients, increased transaction volumes, card services, bill payment and digital channels.
- Financial revenue growth was more modest and was partly offset by international revenue declines from completed implementations and unfavorable currency movements.
- Operating margin improved substantially as scale efficiencies, operational-effectiveness initiatives and lower Open Solutions integration costs benefited results.
- 2013 results included significant Open Solutions acquisition-related effects, including approximately $115 million of acquired-intangible amortization and merger and integration costs, including a $30 million non-cash impairment charge.
- The company’s 49%-owned StoneRiver investment contributed $91 million of income in 2014, including the company’s $87 million share of gains on StoneRiver subsidiary sales. StoneRiver also paid Fiserv $110 million in cash dividends.
- Share repurchases increased to approximately $1.1 billion in 2014 from $578 million in 2013. Approximately 19.8 million shares remained available under the November 2014 authorization at year-end.
- No common-stock dividends have been paid, and management did not anticipate paying dividends in the foreseeable future.
Cash flow, capital allocation and outlook
Management identified normal operating expenses, debt service, capital expenditures and lease payments as primary liquidity needs. These needs were expected to be funded through operating cash flow, cash on hand and available revolving-credit borrowings. Capital expenditures were approximately 6% of revenue in 2014, and product development expenditures were approximately 9% of revenue.
Management’s stated 2015 priorities were to build high-quality revenue while meeting earnings goals, deepen client relationships with increased emphasis on payment and channel solutions, and deliver innovation and integration. The filing does not provide a clear quantitative 2015 revenue or earnings guidance figure.
Risks, contingencies and unusual items
- Competitive pressure, rapid technological change and the entry of large technology, payments and retail companies could affect pricing, client retention and growth.
- Security breaches, cyberattacks, software defects, operational failures or third-party network disruptions could interrupt services, create liabilities and damage client relationships.
- Banking-industry consolidation, client contract renewals and clients’ ability to develop systems internally could reduce revenue or increase pricing pressure.
- Dodd-Frank, CFPB oversight, money-transmitter requirements, payment-network rules and other regulatory changes could increase compliance costs or limit fees.
- Goodwill and intangible assets are substantial; although no impairment was identified in the fourth-quarter 2014 assessment, a decline in reporting-unit fair values could result in a material charge.
- Debt service and refinancing remain important considerations. The company intended to refinance $300 million of senior notes due in 2015 on a long-term basis. A downgrade below investment grade could increase interest rates by up to two percentage points.
- Contractual obligations totaled $5.081 billion, including $4.436 billion of long-term debt and interest, $383 million of operating leases, $207 million of purchase obligations and $55 million of income-tax obligations.
- Subscriber funds invested during payment processing totaled approximately $1.4 billion at year-end and were not included in the consolidated balance sheet.
- Ordinary-course litigation was disclosed, but management did not expect resulting liabilities to materially affect the consolidated financial statements.
- On February 19, 2015, executive equity awards were amended to provide continued vesting after qualified retirement; the filing states that the potential cost could not be quantified.
Most important facts for investors to verify
- Whether recurring Payments revenue and transaction volumes continue to offset slower Financial segment growth and international currency pressure.
- The sustainability of the 2014 margin expansion after lower acquisition-integration costs and other favorable items.
- Execution of the planned refinancing of the 2015 senior notes and progress in reducing or managing the approximately $3.8 billion debt balance.
- The effect of continued large share repurchases on leverage, share count, liquidity and per-share earnings.
- The sensitivity of goodwill and intangible assets, which comprise approximately 77% of total assets, to changes in operating performance and valuation assumptions.
- Potential recurring versus nonrecurring contributions from StoneRiver gains and dividends.
- Exposure to cybersecurity, operational resilience, regulatory developments and client-contract renewals.